SMM Daily Review – 2012/5/14 Copper Market

SHANGHAI, May 15 (SMM) – The most active SHFE 1208 copper contract started at RMB 57,580/mt Monday, slightly higher by RMB 130/mt, but then began falling down following temporary struggle as LME copper lost USD 8,000/mt. Besides, increasing positions and trading volumes, as well as the falling Chinese stock markets also brought pressures on SHFE 1208 copper contract, which fell to a low at RMB 56,150/mt in the afternoon, a fresh low since Chinese New Year, basically hovering weakly around RMB 56,300/mt. SHFE 1208 copper contract finally ended at RMB 56,260/mt, down RMB 1,190/mt or 2.07%. Positions and trading volumes for SHFE 1208 copper contract added by 19,924 lots and 220,000 lots, respectively, and those for SHFE 1209 copper contract increased by 30,548 lots and 102,000 lots, respectively. With growing selling pressures, SHFE copper prices are likely to test support at lower levels for the foreseeable future. 

As SHFE copper prices trended lower after a high open, and as the delivery date for SHFE 1205 copper contract neared, cargo-holders insisted on premium quotes, despite sluggish market transactions. Copper prices fell by more than RMB 500/mt after 10 am, so hedged copper came into markets in large quantities, causing spot copper premiums to slide. Offers for spot copper premiums were between positive RMB 10-80/mt in Shanghai in the morning business. Traded prices for standard-quality copper were between RMB 57,050-57,150/mt, and RMB 57,120-57,250/mt for high-quality copper. As SHFE forward copper contract prices were noticeably down, bearish sentiment was growing in markets. In the afternoon session, SHFE copper prices continued to sink, but spot copper supply remained sufficient. In this context, quotations for spot copper premiums failed to increase in the afternoon, reporting between positive RMB 20-80/mtk, while traded prices were between RMB 56,900-57,100/mt. 

SMM conducted a survey with regard to copper price trends this week.

Based on the survey, 56% of the market insiders are pessimistic over the outlook, believing LME copper will test a fresh low at USD 7,800/mt and that SHFE copper will fall to around RMB 55,000/mt. Europe's prospects are uncertain. A week ago, 70% of voters in Greece rejected the plan to cut the country's budgets sharply to exchange for bailout fund from the EU and IMF, and the efforts to establish a coalition government have also failed, rekindling market fears that Greece may leave the euro zone area. The political upheaval in Europe is likely to cast shadows over the global economic outlook in the coming few months and even years, and the euro will also remain soft. J.P. Morgan announced last Thursday that the company has recently suffered losses of at least USD 2 billion, dampening the already weak markets. According to foreign media reports, Moody's will start to lower credit ratings to about 100 banks this month, including BNP Paribas, Deutsche Bank, and Morgan Stanley. This will be extremely negative for global economic prospects and depress buying interest. In Chinese domestic markets, despite China's cut in the RRR last Saturday, commodity markets are not boosted, which will drag SHFE copper down. Since SHFE near-term copper contract prices are higher than forward contract prices, more investors are buying spot copper and selling copper futures contracts, which will restrict any upward movement in SHFE copper prices. Moreover, downstream consumers will keep cautious ahead of the delivery day for SHFE 1205 copper contract, while both hedged copper cargo-holders and speculators will step up sale volumes given falling prices, which will lead to market surplus. High spot copper premiums are unlikely to extend following the delivery day, which will have a weakening support for copper prices. Hence, these insiders expect copper prices to fall this week.

15% of market insiders are optimistic, expecting LME copper may rebound to around USD 8,100/mt and that SHFE copper will increase to around RMB 58,000/mt. Long investor activity is still active, and news was reported that China's copper smelters and trading firms will delivery copper to LME warehouses. Copper premiums in London remain high. Besides, the Michigan Consumer Sentiment Index hit a 4-year high in May, suggesting that the US economy is improving. Markets are also positive towards the US consumer price index and NY Empire State Manufacturing Index to be announced this week, so US equity markets will likely rally from the lows and help copper prices increase. From technical indicators, copper prices will make corrections following previous drops.

The remaining 29% of market insiders hold the view copper prices will be mired at current values. LME copper should hover around USD 8,000/mt, while SHFE copper prices will lurch around RMB 57,000/mt. Despite the existing long investor activity, the struggle between long and short investors prevails. Combined with selling pressures, copper prices will fluctuate this week. In Chinese domestic markets, China's cut in the RRR means it will bring liquidity of around RMB 420 billion to markets, which will lift markets over the short term. China's imports of unwrought copper and copper semis were 375,000 mt in April, down 87,000 mt from March, but up 42.9% YoY. China's refined copper output was 491,000 mt in April, up 5.1% YoY, and the growth rate is only 8.1% from January to April, the second lowest since 2004. A drop in copper imports indicates weak domestic consumption, while a decline in output means that market surplus has improved some. Therefore, these insiders anticipate copper prices will be little changed from current levels this week.